Morning Commentary: Critical Mass

Foreign Exchange - Morning Commentary
Critical Mass
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Last week’s government jobs report, unfortunately, smashed the record for monthly job losses in the US due to distancing measures.  A more granular look at the data shows that blue collar workers have borne a disproportionate amount of the pain.  Regrettably, this was to be expected as these employees tend to be in sectors most sensitive to social distancing measures and lack the means to weather an extended income disruption. 

Policymakers knew these costs when social distancing measures were put in place to “flatten the curve” and buy time for increased testing.  Having robust testing and tracking capabilities will be critical to reopening as it will allow states to move away from costly statewide lockdowns and towards more targeted quarantining.  Conversely, if US testing capacity is insufficient, re-opening the economy could accelerate new cases and lead to another shutdown or consumer and business behavior that mimics as if there were a shutdown. 

Evidence from around the world suggests that adequate testing rates will result in a positivity rate of less than 10% as you are testing everyone and not just the highest risk people.  For a baseline, South Korea, which has one of the best track records in controlling the outbreak, has a positivity rate of ~5%.  In the US, the positivity rate is ~11.7% and is trending in the right direction.  However, this average number disguises the 1% to 31% positivity rate among individual states.  In total, 17 states have a positivity rate above 10% and a testing rate below the national average.  Within this group, 10 are reopening or have indicated they will do so shortly. 

Relaxing distancing measures that have been growth negative will lead to economic growth, but testing data in the US illustrates why the reopening process poses an asymmetrical downside risk to economic growth projections.  Should a second wave hit the US, economic performance will be hindered by a return of distancing measures/informal distancing behavior as if formal measures were imposed.    
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • The easing of lockdown measures continue to be a key market focus, especially in the US and Europe.  In the UK, PM Boris Johnson set out plans to ease lockdown measures but emphasized that it is still too early to ease major lockdown restrictions.  The UK also plans to impose a quarantine on travelers arriving in the UK.
  • Global COVID-19 cases topped 4 million although data continues to show the virus easing in Europe.  Germany had its fewest new infections in 6 days and Spain had its lowest daily death toll in 2 months.  Denmark is entering phase 2 of its reopening.  However, South Korea had a flare up in cases tied to nightclubs, illustrating the risks all countries face in reopening. 
  • According to news reports, the US will accuse China of trying to hack vaccine and treatment data.  These same reports also show that Iran is trying to exploit the pandemic in order to steal data and attack infrastructure.  Today’s headlines serve as a reminder of the contentious nature of the US-China relationship.  Despite coming to a Phase 1 trade agreement, expect tensions between these two countries to continue to run high as illustrated by the hawkish rhetoric coming out of the White House.  However, expect cooler heads to prevail with Lighthizer and Mnuchin balancing out Navarro.  The US economy was able to absorb the hit from last year’s trade war because it was healthy.  That can’t be said right now.   
  • The next round of US stimulus will face more opposition than previous rounds as Senate Republicans express concern over budget deficits. 
  • Tensions between Germany and the European Commission remain high over the German court’s ruling on ECB actions.  According to EU treaties, the ECB is independent and does not have to answer to national courts.  If the European courts respond to the German courts, it will open up all EU institutions to second guessing by national courts, something the European Commission does not want to happen.  This leaves both sides on a collision course with uncertainty weighing on the euro.
  • Brexit talks resume today with little progress expected.  UK officials continue to insist that there will be no extensions.  The risk remains for a lot of noisy headlines throughout the week.     
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